The worldwide retail market for diamond jewelry was $60 billion in 2010. Like the gold business, the diamond business is segmented into several groups:

Miners and producers, who mine rough diamonds, then sort and sell them.

Cutters and polishers: those who buy rough diamonds from the producers, then cut and polish.

Jewelry manufacturers who create finished pieces.

Retailers who sell the finished jewelry to consumers.

Some operate on several levels of this "value chain." And in recent years — particularly with the advent of selling jewelry on the Internet — a number of these lines have become blurred. There are retailers, for example, who may buy directly from wholesalers. (Read More: Diamond Investing Not for Faint of Heart.)

Miners and Producers:

According to Bain & Company, about 133 million carats of rough diamonds are produced each year. Botswana and Russia are the two largest producers; between them they have about half of the world's production. Australia, Angola, Namibia and Canada make up most of the rest.

There's even fewer diamond producers. In fact, four control about 65 percent of the market: De Beers, Russian producer Alrosa, and diversified mining companies BHP Billiton and Rio Tinto . De Beers alone controls about 35 percent of the market, with Alrosa about 20 percent. (Read More: Diamonds No Longer Rio Tinto's Best Friend.)

Why are diamonds found in so few places? Because large, commercially viable diamond mines are a rarity. Today, there are only about 20 major diamond mines in the world. And the big supply is even rarer — only 11 mines make up 62 percent of the world's production of diamonds by carat!

And they're getting even rarer. The last major diamond mine was discovered in Zimbabwe in 1997.

No matter how big the mine is, you've got to move a lot of rock to get at a very small number of diamonds. Production varies by mine, but the world's "richest" mine — the Jwaneng mine in Botswana — has to move a ton of rock to get 1.4 carats of rough diamond, on average.

That mine moves 8 million tons of rock a year and sells the rough diamonds for an average of $134 a carat. That's $1.5 billion in revenues, from a single mine. And it produces profit margins of 24 percent.

Cutters and Polishers:

The producers then sell their rough diamonds to intermediaries who cut and polish the diamonds. It's a costly process: most rough diamonds lose 50 to 60 percent of their weight going to polished form because material is cut or polished away.

De Beers has a particular sophisticated system for selling their rough diamonds. They sell roughly 80 clients they call "sightholders," using long-term contracts.

Other sales are made using auctions.

In the past, most of the cutting and polishing was done in only a few centers: Antwerp, Tel Aviv, New York, and Russia. Today, the majority of the smaller stones in the world (less than 3 carats) are cut in India, followed by China.

The reason: low labor costs. In the U.S., it costs about $100 a carat to cut a diamond; in India, it costs $10.

To lower production costs, diamond cutters are using sophisticated computer programs that map out the most efficient way to cut a diamond. In recent years, tremendous advances have been made using sophisticated laser cutting machines that can cut and polish diamonds with minimal human labor.

Jewelry Manufacturers:

Once stones are cut and polished, it's time to get them into the hands of jewelry manufacturers. These sales typically take place in the central and regional offices of the diamond cutters, and increasingly at exhibitions that are held in different cities around the world. The two biggest are held each year in Hong Kong and Las Vegas.

Jewelry manufacturing is a fragmented business: there's more than 10,000 players in the world, most of whom are anonymous. There are, of course, a few very famous names who act as manufacturers as well as retailers: Tiffany , Cartier, Bulgari, Louis Vitton, Gucci, and Chanel, but more than 80 percent of the players are in India or China and do not brand their work.

Still, branding is where the big money is. Branding is crucial to profitability. According to Bain & Company, a diamond engagement ring by Cartier may enjoy a premium of 40 percent over an unbranded ring with a stone of identical size and quality.

Retailers, Supply and Demand For Diamonds

Retailers:

This group is even more fragmented than the manufacturers. There's roughly 250,000 jewelry retailers worldwide, most of them locally owned and operated.

Phillip Hayson | Photolibrary | Getty Images

In the past, diamond sales were done largely through specialized stores. Some were famous: Tiffany, Zale , Kay Jewelers. Most are not.

Today, independent jewelry stores are declining. Department stores like Macy's , JC Penney , and Neiman Marcus, as well as discounters like Wal-Mart , Costco and Target , have become a bigger part of jewelry sales. (Read More: Tips to Finding the Perfect Diamond Ring.)

Internet sales have also grown and have been a big help introducing more transparent pricing.

Industrial Diamonds:

Of the 133 million carats produced, only half went toward jewelry. The rest went to lower-end industrial production, where diamonds are used for cutting, grinding and polishing, usually other diamonds. But they are the smallest, lowest value stones. The majority of diamonds for industrial use are now synthetically made.

It's the jewelry business that generates the money; it represents about 95 percent of the value of production.

Diamond Pricing:

Like gold , the diamond industry has had high expectations for diamond demand, primarily due to the huge emerging middle class in India, China, and Latin America. Sales have indeed increased dramatically in those regions.

This would indicate that prices for diamonds should be steady to slightly higher. Prices for bigger, higher-quality diamonds have indeed risen, but prices for smaller, more commercial stones have remained relatively flat or increased only modestly.

Diamond Demand:

Demand is dictated by macroeconomic trends, or simply put, the state of the consumer. Prices are affected by economic booms and by recessions, like those in 2001 and 2008-2009. While prices did drop during the last global recession in 2008-2009, rough and polished diamond prices increased again in 2010 and 2011.

Because diamonds are a luxury item, demand growth is expected to parallel GDP growth. Slower GDP growth, which is now the expectation for the next couple years, particularly in the U.S. and Europe, is a problem for the diamond industry. (Read More: Diamonds Are a Great Way to Diversify - Expert.)

That's also true for emerging market countries like India and China. And currency fluctuations are also an issue. The declining value of the Indian rupee, for example, is a major reason why diamond sales in that country declined in the second quarter of 2012 compared to the same period last year. (Read More: Diamond Prices Soar on Asian Demand.)

What's hot in diamonds right now? Big ones. The biggest increase in pricing has been for larger stones of two carats and above. For example, between 2006 and 2010, prices for a polished one-carat diamond went up 5 percent a year, but prices for a three-carat diamond went up 10 percent, while prices for a five-carat diamond increased 17 percent.

Diamond Supply:

This includes production levels and sales of stockpiles of diamonds. For example, when Russia and Australia brought large mines onto the market in the 1980s, supplies increased and prices dropped.

On the supply side, the diamond industry has a problem similar to the gold business — known reserves are declining, costs are going up, and grades are lower.

Historically, De Beers controlled diamond prices for decades because it had an effective monopoly on global production. But De Beers sold much of its inventory from 2002 to 2007 and no longer has such a strong grip on the market.

Another aspect that might affect diamond pricing in the future: improved acceptance of synthetic gem quality diamonds. Synthetic diamonds have been made for decades but are still largely confined to industrial uses. Prices would have to come down and consumers would have to accept the "value proposition" of synthetic diamonds. To date, none of that has happened.